India-Law.org

The Religare Enterprises Ltd. acquisition by Burmans was an eye-opener for most as to how a hostile takeover of a listed company plays out when it is not supported by the current management; whilst RBI seems to have slept through the whole episode.

The latest Reserve Bank of India (Non-Banking Financial Companies – Acquisition of Shareholding or Control) Directions, 2025 (issued under reference RBI/DOR/2025-26/340) consolidate and update the regulatory framework governing changes in ownership, control, and board composition across all layers of NBFCs (including HFCs) but its perusal makes it clear that no lessons seem to have been learnt from the Religare case.

The permissions are primarily required to be taken by or with the NBFC in case of any change in control i.e. takeover. In contrast, the SEBI Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 place the various regulatory burden on the acquirer.

RBI’s NBFC Directions have no provision for a post-facto approval to validate a market acquisition. RBI’s rules make sense only if the NBFC was issuing/allotting new shares to the proposed acquirer; in such cases placing the burden on NBFC to seek approvals is understandable. However, in case of a market acquisition of a listed company, the NBFC has no role in such an acquisition where share-holders sell their shares to the new acquirer. It places the existing management in the uneasy position of having to seek approval on behalf of the acquirer who seeks to oust them from control.

It is even unclear if other obligations of joint public notice in relation to an open offer or hostile takeover can be fulfilled under those Directions in case of a hostile takeover without regulator forcing it.

Religare’s case was novel as RBI’s Directions [then or now] never explicitly envisage compliance happening through directions issued by other regulators, such as SEBI or IRDAI, to the target company/NBFC every time a hostile takeover of listed NBFCs happens, yet without the assistance of SEBI’s interpretation of its SEBI’s Takeover Code and Listing Regulations it would have been questionable if RBI could have meaningfully applied its own Directions to a hostile takeover.

Presently there are more than 9000 NBFCs registered with RBI, out of which around 300 are listed entities. Sale and purchase of shares of listed entities are governed by one basic precept- the free transferability of their shares over a faceless stock exchange mechanism. Acquirers’ who seek to gain control of listed financial companies by stock purchase must usually satisfy the requirements of multiple regulators, including SEBI. SEBI’s requirement is usually generic and require the acquirer to undertake a public offer for share-holders who may not be willing to continue to remain as share-holders under the new management. Listed NBFC are regulated by SEBI only for the purpose of open offer requirements with the other relevant regulator i.e. RBI looking after ‘fit and proper’ requirements in relation to registrations issued to the NBFC.

RBI as the primary regulator of banking companies & NBFCs regulates change in control in a more detailed manner. RBI is concerned not merely with the manner, mode and interest of public share-holders but also whether the acquirers are ‘fit and proper’ for running these regulated businesses. 

A wealthy industrialist acquiring the controlling stake in a bank or a NBFC for no reason other than he can, continues to be an anathema in this country. Thus, in line with Section 12B of the Banking Regulation Act, 1949 the RBI has framed the Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023 which require the ‘acquirer’ to seek the necessary approval from the RBI and the bank being taken over only provides comments. The guidelines are not just workable but also lenient as they recognize that a person may acquire major share-holding in a banking company and then apply for post-facto approvals and till such time is not permitted to exercise voting rights on such share-holding.

But RBI’s current Directions to NBFC borders on absurdity. The current directions could only work in case of private sale by the promoter-management of the listed NBFCs when the promoter-management was willing to exit by sale of shares held by them to the acquirer. Either, the draftsman had no clue about hostile takeovers or had the astrologer’s foresight that other regulators such as SEBI will come to the rescue after months of RBI’s inaction as happened in Religare and enforce RBI’s Directions or happily assumed that the NBFC and its management will willingly co-operate in the handover of control to a hostile acquirer.

The Directions are not workable in case of a market led hostile takeover, where the public float is large enough for an outsider to acquire shares from public share-holders and gain control against the wishes of existing management which may have less than 51% share-holding to maintain absolute control. With two opposing camps both of which wish to continue to be share-holders and maintain control, co-operation is impossible. Nor can an acquirer be expected to give a 30-day prior notice of purchase ‘jointly’ with some thousands of faceless public share-holders/transferors in respect of a transfer which would take place over a stock exchange as ‘parties concerned’. How is this supposed to be complied ‘jointly’ in case of an open offer for 26% share-holding in a listed NBFC; how should the public share-holders undertake this exercise 30 days in advance of the open offer? The Directions made the problem acute where RBI even specified that the approval must be applied in advance only by the NBFC. This literally gave the existing management the right to decide if it wanted to give up control and apply for approval to the RBI. There are no prizes for guessing that this will never willingly happen in the case of a hostile takeover and suitable reasons will always present themselves to justify such inaction.

While it is tempting to say that the Directions do not apply because they are unworkable and impossible to satisfy but that would mean that it is open to do a hostile takeover of a listed NBFC without being approved under law as being ‘fit and proper’; that on its own is an anathema to regulated markets.

As a responsible regulator RBI needs to recognize that its Directions do not have any mechanism to deal with hostile takeovers in case of listed NBFCs, and amend the same to validate current acquisitions and future ones by providing for approvals and public notice to be applied for by the acquirer alone instead of the target company, or jointly with the transferor, etc. There is no reason why RBI cannot streamline the guidelines for NBFC on the lines of banking companies and make life easy for everyone including itself. The RBI’s Directions and the way they are being applied to hostile takeovers in listed NBFCs is plainly arbitrary, irrational and hostile acquirers may be left with no option but to challenge their constitutionality at some point.

**********

-Suraj Chaudhary, Advocate Bombay High Court